33% domestic stocks bias

thegentleway

What are experienced investors thoughts on “The optimal weights remain near one-third domestic stocks and two-thirds international stocks regardless of age—with no material fixed income allocation”

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4590406

EDIT: would one use FTSE350 for uk domestic stocks?

PixelPound

This is a US study. The US makes up 60% of the global stock market, the UK just 4%.

Many US investors a mostly in domestic stocks and bonds so a suggestion they tilt to one third domestic is vastly different to suggesting a UK investor does. Not sure basing investing choices on the back of a single study is good either. 

Eyeful

Sound like a financial salesperson touting for business and using buzz words to impress prospective customers! 

tacpot12

As a UK based investor, I would agree with the first part of the advice ("The optimal weights remain near one-third domestic stocks and two-thirds international stocks regardless of age") IF you are following a total return strategy. If you are following an income strategy AND you are reliant on the income to meet your basic living expenses, you might need to have a bit more in domestic stocks (say upto 50%) - this is my approach.

I disagree with the second part of the  advice (" - with no material fixed income allocation"), or at least would qualify it. Analysis shows that a fixed income allocation reduces volatility. I would dispense with it during the 'accumulation phase' of your life - that period when your main aim is to grow your portfolio, but for a retirement portfolio switching to a 60% equity/40% fixed income allocation makes a lot of sense to reduce the volatility as this has a very significant effect on the safe withdrawal rate.

thegentleway

PixelPound said:

This is a US study. The US makes up 60% of the global stock market, the UK just 4%.

Many US investors a mostly in domestic stocks and bonds so a suggestion they tilt to one third domestic is vastly different to suggesting a UK investor does. Not sure basing investing choices on the back of a single study is good either. 

Right… but there is a currency hedge from investing in domestic stocks? 

OldScientist

Eyeful said:

Sound like a financial salesperson touting for business and using buzz words to impress prospective customers! 

Or three academics who have used historical data and detailed analysis to find the 'optimal weights' for US retirees (whether the optimum is the same for UK retirees is not addressed). There are, in my view, some limitations to their analysis, but that is a different question.

For the OP: For UK investors, using a global market index will probably be good enough.

PixelPound

thegentleway said:

PixelPound said:

This is a US study. The US makes up 60% of the global stock market, the UK just 4%.

Many US investors a mostly in domestic stocks and bonds so a suggestion they tilt to one third domestic is vastly different to suggesting a UK investor does. Not sure basing investing choices on the back of a single study is good either. 

Right… but there is a currency hedge from investing in domestic stocks? 

There are currency hedged options if looking at ETF's, e.g. Invesco S&P 500 GBP Hedged ETF (ticker symbol G500) with TER 0.05% which is up around 18% for the year verses unhedged (like Vanguard's VUAG TER 0.07%) which are around 9% due to the weakening dollar. However if you consider last 6 months or 3 months then you find the unhedged versions have done better.

For the long term investor, investing in terms of decades, then whether hedging is beneficial is very much debatable. For one there is a cost for the hedging and for two over the long term currency fluctuations are less likely to have an effect if using a strategy such as pound-cost-averaging. Sometimes it will make the foreign stock cheaper to buy, others less so. It's not all in one direction.

As to investing in domestic stocks as a hedge, surely the factor there is the overall return. FTSE100 has had a good year in 2025 (up 21% for the year, and FTSE 250 just 9%), but last year it was under 14% and approx 6%(annualised) when looking at last 10 or 20 years, much lower than S&P 500's 10% average.

However I do think a home bias is a good option, but you need to consider your reasoning and whether it should be a third. Mine is roughly 10% (of the equity portion) as some very nice dividend payers. This might increase once I reach about 5 years to retirement, but similarly I will rotate from growth US to value US as whilst it introduces withholding tax, can still be worthwhile.

Linton

Two concerns with investing significantly in a FTSE100 companies...
1) You are not really investing in the UK. Many of the FTSE 100 companies do much more business overseas than in the UK, but just happen for historical reasons to be registered with the LSE.  A few do no business in the UK at all.  So just investing in the FTSE100 does not shield you from the world economy.

2)  The FTSE100 has a rather different sector allocation to the world as a whole. In particular Tech + Comms is  at about 3.6%, whereas in a global index those 2 sectors represent 36% of the total. I know that many people believe that the tech sectors are overvalued but choosing to ignore them virtually completely is perhaps an over-reaction. Conversely energy+raw materials in the FTSE100 represents about three times the global allocation.

I believe the differences in sector allocation is a far more important driver for differences in performance than whether the companies you choose to invest in are quoted on the LSE.

masonic

thegentleway said:

PixelPound said:

This is a US study. The US makes up 60% of the global stock market, the UK just 4%.

Many US investors a mostly in domestic stocks and bonds so a suggestion they tilt to one third domestic is vastly different to suggesting a UK investor does. Not sure basing investing choices on the back of a single study is good either. 

Right… but there is a currency hedge from investing in domestic stocks? 

It depends what you mean by "domestic stocks". If you buy a FTSE100 or All Share index, or most active funds in the sector, then you'll hold primarily multinational companies with significant overseas earnings. Just because a stock is priced in sterling, it does not mean its share price is immune to currency risk. The explicit currency hedged ETFs may give you more protection. There must be quite a small number of truly insular companies whose costs and sales are independent of global markets, where goods and services are priced in various currencies according to exchange rates.

However, this is very different for bond markets, where you are buying a specific sequence of cashflows over a finite period of time. In that situation, currency risk introduces uncertainty in future returns that is not present in sterling bonds.

Coming back to the original article, it is advocating 33% USA and 67% global ex-USA, which is an allocation that would have disappointed over the last 20 years, but some are reducing their US exposure for other reasons.

MA260

Just a thought on the balance of portfolios and currency risk, maybe being overweight in Europe is a way to reduce the currency risk, as EUR/ GBP tend to move in same direction against USD

masonic

MA260 said:

Just a thought on the balance of portfolios and currency risk, maybe being overweight in Europe is a way to reduce the currency risk, as EUR/ GBP tend to move in same direction against USD

I'm not really seeing much better alignment with EUR as compared with USD:

But currency matters little when you are investing in a productive asset like a company.